Late last night, Moody’s downgraded Ireland’s sovereign rating to “junk” (to Ba1 from Baa3); outlook negative. However, Moody’s said Italy is not in the same situation as Ireland because it has access to the market

PIMCO said that it is using the latest sell off in Italian bonds to increase its own holdings

Weakness was observed in GBP after the jobless claims data from the UK registered its biggest jump in two years

According to reports, all German and Italian banks participating in stress tests are likely to pass, however some Spanish banks may fail the test

Market Re-Cap

Despite a sovereign downgrade of Ireland to "junk" by Moody's late last night, risk-appetite was observed in the market, led by out performance in Italian asset-classes after Moody's said that Italy is not in the same situation as Ireland due to its market access. This supported EUR across the board as well as the European equities, which together with comments from PIMCO that it is using the latest sell off in Italian bonds to increase its own holdings, weighed on bunds. Bunds came under further pressure following speculation that official names were checking European bond prices, and the peripheral Eurozone 10-year government bond yield spreads narrowed across the board. Weakness in the USD-Index provided strength to EUR/USD, GBP/USD and commodity-linked currencies, however, some weakness was observed in GBP/USD following the release of jobless claims change data from the UK, which showed the biggest jump in two years in June.

Moving into the North American open, markets look ahead to economic data from the US in the form of the monthly budget statement, and import price index as well as Fed's Bernanke semi-annual testimony in the House of Representatives. In fixed income, USD 21bln 10-year Note auction, together with the release of Fed's tentative outright treasury operation scheduled are also expected later in the session.

Asia Headlines:

BoJ upgrades its economic assessment in its July monthly report and said the Japanese economy is picking up with supply constraints easing. However, Japan’s government kept their economic assessment unchanged for July; saying the economy is showing upward movements but remains in severe state due to the earthquake. (RTRS/Sources)

PIMCO’s Bill Gross has soured further on the US economic outlook and has jacked up buying of US Treasuries in June. Gross’ USD 243bln Total Return Fund held 8% in US Treasuries and Treasury-related securities as of the end of June 30th, up from 5% as of the end of May. It is worth noting that Gross earlier said that the only way he would purchase Treasuries in a big way again is if the US headed into another recession. (RTRS)

In other news, S&P revises outlook on Florida to Stable from Negative. Florida’s outlook revision reflected new budgets, progress the state has made in addressing its structural imbalance through significant cost cutting measures. (RTRS)

Also, the US' sovereign credit rating is likely to be downgraded regardless of whether the US Congress reaches an agreement on raising its statutory debt limit. "If the debt limit is raised and the public debt continues to grow, it will further damage the US' debt-paying ability, which is a key factor in Dagong's evaluation, and we will consider lowering its ratings accordingly," said Guan Jianzhong, chairman and CEO of Dagong. (ZeroHedge)

Elsewhere, officials fighting the next financial crisis may again bail out banks using the public purse, S&P has said, in an opinion that casts doubt on one of the fundamental tenets of US financial reform. The rating agency said on Wednesday that the US Treasury, Federal Reserve and Congress might rescue a large financial group rather than allow it to fail like Lehman Brothers. (FT - More)

EU and UK Headlines:

ECB’s Draghi said Italian growth rates are likely to remain below levels of main European partners over the medium-term, adding that the Italian government must rapidly define further measures to meet goal of bringing budget into balance by 2014. He also said that it is certain that all Italian banks will pass the European stress tests. (RTRS)

In other news, Moody’s said risks that private creditors will be required to share the burden of future Eurozone bailouts have been growing in the past few days, further weighing on the ratings of Ireland, Portugal and Greece. The risk is that Ireland, Portugal and Greece will be unable to return to international capital markets once their current bailout programs expire because the private sector precondition would likely increase borrowing costs for those countries. Moody’s says Italy is not in the same group as Ireland as it has market access. (RTRS)

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the circular reasoning by moody's on italy is great....italy is okay because it has mkt access, but if it doesn't have mkt access we downgrade them, making it even more difficult....what a slippery slope

With all the abstraction in currencies now, even high governments cant define what money is. Debt itself is collapsing as a currency, because there is no backing for it. Enforcement is slipping away into willfull indentured servitude (IMF), which will ultimately fail.

The populations of the world define money as gold and silver; therefore a bottom up dictate will be forced to emerge at some point.

A significant gold/silver holding will be necessary for any new international currency introduction, this is unavoidable.